Just blame the broker?

In this decision, the English High Court determined claims made by an insured against its insurance brokers for negligence. The decision is particularly relevant to how the courts assess an insured’s loss in circumstances where it has not pursued its insurance claim against insurers but instead seeks full indemnity from its broker. We also set out what we see as the key lessons insurance brokers can take from the decision.

Background

The Douthwaite and McQueen families owned and operated a waste recycling facility through two entities: Widnes Land Partnership LLP (Widnes), which was the freehold owner of the premises on which the facility operated, and Doumac Limited (Doumac) which leased the premises from Widnes and undertook the recycling operations.

Dissatisfied with their previous insurance brokers, Widnes and Doumac appointed the defendant, Butterworth Spengler Commercial Limited (Butterworth). Butterworth placed the following relevant insurances:

for Widnes, buildings and property owner’s liability cover with Novae.

In January 2012, a storm caused damage to property at the recycling facility. This affected Doumac’s processing ability and led to the build-up of waste at the site. Because of this, the Environment Agency inspected and reported that Doumac was in breach of its permit. Novae gave Doumac and Widnes 30 days’ notice to cancel its policies as this breach of permit meant the facility was an unacceptable risk from Novae’s perspective.

Butterworth approached an alternative insurer, Aviva, to underwrite the policies. Aviva’s quote provided for an “External Storage Condition” which made clear that any combustible materials stored outside must be kept at least 10 metres away from any building at the facility. Doumac and Widnes instructed Butterworth to place their respective insurances with Aviva.

In around July 2012, Doumac became insolvent. A new company, JL Sorting Limited (JLS), was set up to take over Doumac’s business. Butterworth was instructed to ensure that Doumac’s insurance policies were transferred to JLS.

In October 2012, a fire destroyed the facility. Both JLS and Widnes made claims under their respective policies. Aviva raised a number of concerns:

whether the insureds had discharged their duty of good faith in relation to disclosure of the past experience of fires at the site and the insolvency of Doumac; and

non-compliance with the External Storage Condition.

Aviva declined the claims. Firstly this was due to the breach of the External Storage Condition. Secondly, Aviva claimed that cover was voidable as there had been no disclosure to it of Doumac’s insolvency.

XL also declined cover on the basis that the insureds had failed to disclose warnings given by various authorities regarding excessive amounts of waste at the facility, previous fires that had occurred at the facility and the poor condition of the buildings.

No proceedings were commenced against either Aviva or XL. JLS and Doumac assigned its claims to the plaintiff, Dalamd Limited (Dalamd), who brought proceedings against Butterworth claiming that it:

failed to disclose to Aviva Doumac’s insolvency and/or made a misrepresentation to Aviva about it;

gave inadequate advice in relation to business interruption (BI) cover;

gave inadequate advice about the existence and/or effect of the External Storage Condition;

failed to advise Widnes to obtain cover for loss of rent; and

failed to give adequate disclosure to XL and/or gave inadequate advice to the insured in relation to the matters which should be disclosed to XL.

Alleged breaches

a. Doumac’s insolvency

The insured had informed Butterworth of Doumac’s impending insolvency and asked that its existing covers be transferred to JLS. The Butterworth broker, Andrew Thomson, recorded a file note of a telephone discussion with a representative of Miles Smith London Market Broking (Miles Smith), the placing broker for Aviva. That note recorded that Mr Thomson had informed Miles Smith that Doumac was “going into administration” and a new company, JLS, was taking over Doumac’s operations. The representative of Miles Smith asked Mr Thomson to confirm in an email to Hayley Jennings, who was the main handler of the file for Miles Smith. Mr Thomson’s email to Mr Jennings did not refer to Doumac’s insolvency. Instead, Mr Thomson referred to it incorrectly as merely “a change of a trading name”.

Butterworth argued that it had disclosed the insolvency to Miles Smith and that Miles Smith was Aviva’s agent. Butterworth acknowledged that the wording of Mr Thomson’s email to Ms Jennings was unfortunate, but disclosure had already been made in the initial phone call anyway.

The Court found that Butterworth breached its duty in relation to the disclosure of Doumac’s insolvency to Aviva. First, there was no cogent evidence that Miles Smith was Aviva’s agent for relevant purposes – ordinarily a placing broker is an agent of the insured, not the insurer. Secondly, Butterworth could not establish that the person from Miles Smith who took the initial telephone call had authority to deal with the risk. The email to Ms Jennings, who had authority to deal with the risk, was inaccurate and did not adequately disclose Doumac’s insolvency.

b. BI insurance advice

JLS’ BI insurance cover was for ICOW only, without cover for loss of gross profit. ICOW provides cover for costs incurred by the insured to mitigate a reduction in turnover as a result of property damage. Dalamd argued that standalone ICOW was not appropriate for a risk like JLS because in an event that destroyed the facility, there would be little that could be done to mitigate loss of profit until JLS’ property and plant were reinstated and hence any ICOW claim would be limited. Dalamd argued that this was not explained adequately to Doumac or JLS.

The Court found that there had been lengthy discussions with Doumac in relation to BI insurance and there had been an adequate explanation given as to the differences between cover for gross profit and ICOW. Mr Thomson’s advice in respect of BI insurance had not been recorded in writing. While this was unfortunate, the Court preferred his evidence to the insureds’ witness. The Court also found that Doumac had not taken out cover for loss of gross profit not because of inadequate advice by Butterworth, but because it could not afford it.

c. Existence and effect of the External Storage Condition

In a telling sign, the Court remarked that this part of the claim “faced insuperable causation difficulties”. Aviva’s quote, which incorporated the External Storage Condition, was provided to Doumac and its terms were clear as to the effect of non-compliance.

The Court noted that it appeared Butterworth did not specifically draw the existence of the condition to Doumac’s attention, at least in writing. However, the Court accepted that the condition had been brought to Doumac’s attention during a survey conducted by Aviva’s surveyor. This was sufficient.

d. Loss of rents cover

As noted above, Doumac leased the relevant premises from Widnes. Consequently, loss of rent was a key risk for Widnes. Cover for this risk was not discussed by Butterworth at any stage and it appeared to have been simply overlooked. Accordingly, the Court found that Butterworth’s failure to raise this with Widnes was a breach of duty.

e. Inadequate disclosure or advice as to what should have been disclosed to XL

Dalamd firstly argued that Butterworth failed to disclose material matters about its risk of which it was aware to XL. Mr Thomson accepted that he knew there had been a build-up of waste at the facility. The Court found that this failure was in breach of Butterworth’s duties.

Dalamd also argued that Butterworth gave inadequate advice as to what ought to be disclosed and failed to take proper steps to elicit such matters from Doumac. The Court considered that there were a number of failings by Butterworth in this regard. In particular, Butterworth had not advised Doumac to disclose, nor had it taken proper steps to elicit, previous fire incidents. The Court described this as “perhaps the most obvious example of the type of question that a broker ought to ask of a client in respect of a policy which covers property damage caused by fire”. A reasonably competent broker ought to ask his or her client about previous fires and make it clear that that includes fires that did not result in a claim.

Causation

This case is unusual in that the insureds decided not to press claims against their insurers and instead sought indemnity solely from the broker. Most cases in this area involve either joint proceedings brought against both the insurer and broker or a proceeding brought against a broker to recover an alleged shortfall, caused by the broker’s negligence, in a settlement between the insured and insurer.

In this case, Dalamd argued that it did not have to show that the insurance claims would have failed as a result of Butterworth’s negligence. Instead, Dalamd argued that all it had to show to establish causation was that
Butterworth’s negligence provided the insurers with a reasonably arguable ground to defend liability. In relation to other policy issues that the insurers may have raised, Dalamd argued that it is to be assessed on a loss of a chance basis whether the insurers would have taken the point, whether the insurers would have compromised the insurance claim and what a court would decide if the point had been maintained to trial by insurers.

The Court found that Dalamd’s position would “produce potentially anomalous results”. Its effect would mean that if an insurer puts forward an arguable defence based on a broker’s breach, then the insured could elect not to pursue the insurer and, if there were no other reason for the insurer to decline cover, recover from the broker in full.

Instead, courts have to determine whether the policy was voidable or not due to the broker’s negligence either as a matter of law or, insofar as issues of fact arise, on the balance of probabilities. Whether the policy could be voided due to some other issue for which the broker was not responsible must be determined on the same basis.

The Court applied this reasoning to each of the breaches alleged by Dalamd against Butterworth. As to the breaches successfully made out against Butterworth:

In relation to the non-disclosure of Doumac’s insolvency to Aviva, the Court found that this provided a good defence to claims by JLS under the policy. It was more likely than not, that had disclosure been made, Aviva would at least have stipulated for some alteration of the terms on which JLS was insured. However, any argument by Aviva that Widnes’ cover was voidable would have been wrong as non-disclosure by one insured under a
policy will not affect the cover of the other insured.However, the Court then turned to Aviva’s reliance on the breach of the External Storage Condition, for which Butterworth was not responsible. The Court found on the balance of probabilities that Aviva could successfully argue that the policy was voidable by reason of the breach of this condition. Accordingly, Butterworth’s failure to disclose Doumac’s insolvency did not cause any loss to the insureds.

In relation to Butterworth’s failure to advise Widnes to obtain loss of rents cover, the Court found that, even if this advice had been given, it was unlikely that Widnes would have bought the cover. Widnes’ previous broker had recommended the cover but it was likely not obtained at that time due to cost considerations.Alternatively, the Court found that it was unlikely that the insurers would have agreed to indemnify Widnes for loss of rent. By the time of the fire Doumac was insolvent and JLS had not yet entered a lease agreement with Widnes. JLS had paid no rent to Widnes.

In relation to disclosures that should have been made to XL, the Court found that the non-disclosures on the balance of probabilities meant that the policy was voidable. Accordingly, Butterworth’s negligence had caused loss to JLS, namely its right to indemnity under its contractor’s all risks policy. The Court found that Dalamd was entitled to recover damages in the value of JLS’ plant and machinery, being £1,600,000.

Key learnings for brokers

Insurance brokers can take a number of learnings from the decision:

Ensure that there is a written record of all advice provided to, and decisions made by, the client and that the record is provided to the client. A written record of advice and decisions provided to the client allows them the opportunity to clear up any misunderstandings or seek further clarification.

Ensure that you disclose material facts only to the insurer’s representative who has authority to deal with the risk.

Where a client has decided not to buy insurance for a certain risk, it is good practice to revisit this decision with them periodically, when there are business or personnel changes or at least upon renewal.

Identify all risks to a client’s business and discuss with the client insurances available to insure those risks.